When it comes time to buy a new vehicle, most people don’t think twice about the process of getting a loan. But what about those folks who have negative marks on their credit report?
Getting a car loan can be difficult if you and your credit score have suffered some setbacks. Luckily, there are options for people who have difficulty getting financed through conventional lenders. (See our list of bad credit auto lenders.)
Subprime auto loans are an effective way for buyers with poor or no credit to purchase a much-needed vehicle. But before you go this route, there are some key factors to consider. Here are five important things that you need to know about before you commit to a subprime auto loan.
1. Higher interest rates
Subprime loans are given to folks who have less than perfect credit and are thus considered to have a higher risk of defaulting. Because of this, lenders charge higher interest rates on this type of auto loan. Those higher interest rates mean subprime borrowers will pay more for their new vehicle over the life of the loan – sometimes a lot more!
2. Stricter terms and requirements
In addition to higher interest charges, the down payment required for a subprime auto loan is often higher as well. Where a buyer with good credit may be able to put little or nothing down, some subprime lenders require up to 20 percent down as protection against the borrower defaulting.
Also, a borrower with poor credit typically isn’t in a position to negotiate the best selling price on the vehicle they’re buying.
3. Longer repayment plans
Many dealers have started extending repayment plans significantly for subprime auto loans. It’s not uncommon to see terms start a five years and extend even more, upwards of eight years in certain cases.
Contrary to point number one, this may mean reduced interest rates and more manageable payments for subprime borrowers. However, the total amount of interest paid over those five to eight years will be significantly higher than someone with good credit paying off their loan in half the time.
4. Subprime loans can be bundled
Just as with the subprime mortgage market in the mid-2000s, subprime auto loans can be bundled and sold to investors. That means the lender who you pay each month could change; maybe more than once. The result may be missed payments, errors in crediting your payment, and extra complexity if you need to talk to your lender.
5. Subprime lenders are often less tolerant
When a borrower misses a payment or two on their car, the lender has a choice of when and what actions to take. Subprime lenders are often less tolerant of missed payments and will sometimes initiate repossession of the vehicle quickly and with little notice.
Card dealers these days are often willing to take on buyers with less than perfect credit because it means more overall sales volume for the dealership. It also means little risk, since most dealers aren’t taking on the loan themselves.
For this reason, car buyers with past credit problems will often find the dealership willing to work with them and come up with a way to make the sale.
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